Glencore Mine Deaths Give Xstrata Funds Extra Ratio to Mull

Glencore International Plc, based in Baar, Switzerland, trades commodities such as coal and oil and owns mines, factories, tankers and warehouses. The company disclosed 36 employee fatalities in the past two years. Source: Glencore International AG via Bloomberg

Aug. 31 (Bloomberg) -- Xstrata Plc investors voting next
week on Glencore International Plc’s $32 billion bid are being
asked to accept a takeover by a commodities supplier with the
highest employee fatality rate among its closest peers.

Glencore, whose 61,000 employees are mostly at mines and
industrial sites, reported three deaths for every 10,000 workers
in 2011. That’s more than triple the 0.8 rate at Xstrata, the
world’s largest exporter of thermal coal. The death ratios were
0.9 and 1.2 at Rio Tinto Group and Anglo American Plc,
respectively, while the biggest mining company BHP Billiton Ltd.
reported a 0.2 rate in its 2011 fiscal year.

With Xstrata trading 10 percent below the bid in the year’s
biggest takeover, investors who meet Sept. 7 are showing more
concern that the deal is not generous enough. Even so, worker
deaths can erode image and earnings should the two Swiss
companies combine their 101 mines and 25 ore smelters worldwide.

“Poor safety performance can impact on production levels
and a company’s ability to generate profits,” said Julie
McDowell, head of socially responsible investment at Standard
Life Investments. The insurer, which is Scotland’s largest and
owns both stocks, declined to say how it will vote.

Qatar Holding LLC, which owns 12 percent of Xstrata, said
yesterday it will vote against the bid. The investment arm of
Qatar’s sovereign wealth fund said that while it supports the
deal in principle, it will reject the merger terms on offer.
Knight Vinke Asset Management LLC reiterated its intention to
vote against the deal in an e-mailed statement today.

Investor Pressure

Mining companies across the world have sought to reduce
fatalities, under pressure from investors, governments, labor
unions and lobby groups. Aside from a duty of care to employees,
mining deaths often result in production stoppages, hurting
share prices and curbing earnings growth.

Vedanta Resources Plc, the Indian miner controlled by
billionaire Anil Agarwal, slumped 15 percent in the six weeks
after May 17 when it reported 22 deaths in the fiscal year
through March, compared with a 4 percent decline in London’s
FTSE 350 Mining Index.

Fresnillo, the world’s largest primary silver producer,
fell about 17 percent in the six weeks after its April 18 output
cut, prompted by safety-related slowdowns. The stock also
underperformed the benchmark.

Due Diligence

Glencore, based in Baar, Switzerland, trades commodities
such as coal and oil and owns mines, factories, tankers and
warehouses. The company disclosed 36 employee fatalities in the
past two years, four times more than Xstrata. It’s a statistic
some advisers to fund managers at the U.K.’s largest investors
say should be among factors that determine how to vote.

“We absolutely think these issues should be considered in
the due diligence prior to a merger,” said Karina Litvack, head
of governance and sustainable investment at F&C Asset Management
Plc. The company, which owns both stocks among the $163 billion
it controls, wouldn’t comment on how it would vote.

“The obvious question is ‘Are the Xstrata techniques going
to be adopted across the Glencore operations?,’ Litvack said.
‘‘We’ll see.’’

Glencore, which changed its name after management bought
out former U.S. fugitive Marc Rich’s eponymous trading firm in
1994, held a $10 billion initial public offering in May 2011 and
has declined 33 percent through Aug. 30 this year.

Further Improvement

Glencore’s death toll in the past two years ranks third
behind Kazakhmys Plc, which had 56, and Vedanta, where 48
workers died in the past two years. In its fiscal year ending
March 2010, Vedanta disclosed 67 deaths.

‘‘Any fatality is unacceptable and avoidable,” said
Michael Fahrbach, Glencore’s head of sustainability.

“Glencore has set high global standards for health,
safety, environmental and community relations performance under
the Glencore Corporate Practice program,” he said. “In many
cases, our industrial operations exceed these standards, and
have done so in some cases for many years. However, there is
clearly room for further improvement.”

Death Investigations

Glencore has begun an assessment of its health and safety
and environment practices, which started at its South American
metals operations in January, and will be rolled out to other
businesses during the rest of the year, it said.

Glencore requires that fatal accidents be examined within
72 hours by a team including independent investigators, with a
report sent to the health and safety committee for review, the
company said.

“We are in constant dialog with our investors,” Fahrbach
said. “We go into very detailed discussions with them on our
HSEC performance. Of course, fatalities are also subject of
these discussions. They are as concerned as we are.”

“Sometimes companies say ‘What can we do, we operate in a
country where life is cheap?’” McDowell said. “They need to
move on to a phase where they understand that they have the
power to control and influence what happens when people are on
their premises.”

By combining with Glencore, Xstrata may dilute a health and
safety record that it has been keen to promote.

“Safety is of course a primary concern for our board and
management team,” Xstrata Chairman John Bond said at the
company’s May shareholder meeting. “Our safety performance
ranks among the leading companies in our industry.”

Meeting its sustainability commitments is essential for
long-term success and gives Xstrata competitive advantages, the
company said in a e-mailed response to questions.

BHP Example

“Working in an environmentally responsible and safe way,
and being a good neighbor to communities allows us to
successfully operate mines and develop new resources, recruit
and retain the best people, sustain capital markets’ support and
manage the risks associated with the substantial investments to
develop and sustain our operations,” it said.

Juan Salazar, governance and sustainable investment analyst
at F&C, said BHP, Rio and Xstrata set examples that others in
the industry could follow.

There are “clear commitments from top management and the
board on having a good safety performance,” Salazar said of the
three companies. “The predominant thing here is the consistent
message that runs through the companies.”

Lowest Scores

BHP, Xstrata and Rio have the highest environment, social
and governance disclosure score among the 11 mining companies in
the U.K.’s FTSE 100 index, according to data compiled by
Bloomberg. Glencore had the second-lowest score, trailed only by
Chilean copper producer Antofagasta Plc.

The Bloomberg disclosure measure is an indicator of how
transparent companies are, rather than an assessment of their
environment, social and governance performances.

Glencore also has the highest employee turnover rate among
BHP, Rio, Xstrata and Anglo at 14 percent, the Bloomberg-compiled data show.

Both F&C and Standard Life cite Anglo American CEO Cynthia
Carroll as an example of a company leader taking a personal
stand to combat health and safety failings.

Carroll, who took over the helm at Anglo in 2007, said that
year that its safety performance was “completely
unacceptable.” In 2006, Anglo reported 44 fatalities, a figure
that dropped to 17 last year.

“Many chief executives make it a personal action point,”
said Standard Life’s McDowell. “We’ve seen Cynthia Carroll at
Anglo American take a very strong stand.”

Zero Harm

“Despite the improvements in our safety record since 2007,
with a significant reduction in the number of our people who
have lost their lives at work and lost time injury rates, we
have a long way to go to achieve our objective of zero harm but
we are determined to get there,” Anglo said in an e-mail.

Glencore reported that 18 people died at its operations
last year, without giving further details.

“We expect companies to behave in a moral way,” said
F&C’s Litvack. “But that’s not necessarily the argument that’s
going to win the day. The argument that does win the day is that
‘We’re worried about the share price if you don’t do this
properly.’ We have to gauge the audience.”